W. R. Berkley (WRB) 10-Q 2008 Q3 Quarterly report

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark one)

þ QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 2008

or

o Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

For the Transition Period from ____ to ____.

Commission File Number 1-15202

W. R. BERKLEY CORPORATION

(Exact name of registrant as specified in its charter)

Delaware	22-1867895
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

475 Steamboat Road, Greenwich, Connecticut	06830
(Address of principal executive offices)	(Zip Code)

(203) 629-3000

(Registrant’s telephone number, including area code)

None

Former name, former address and former fiscal year, if changed since last report.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yesþ     Noo

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filerþ	Accelerated filero	Non-accelerated filero	Smaller reporting companyo
		(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yeso      Noþ

Number of shares of common stock, $.20 par value, outstanding as of November 3, 2008: 161,244,824.

TABLE OF CONTENTS

Part I — FINANCIAL INFORMATION
	Item 1. Financial Statements
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3. Quantitative and Qualitative Disclosure About Market Risk
	Item 4. Controls and Procedures
PART II — OTHER INFORMATION
	Item 1. Legal Proceedings
	Item 1A. Risk Factors
	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
	Item 6. Exhibits
SIGNATURES
EX-31.1: CERTIFICATION
EX-31.2: CERTIFICATION
EX-32.1: CERTIFICATION

Part I — FINANCIAL INFORMATION

Item 1. Financial Statements

W. R. Berkley Corporation and Subsidiaries
Consolidated Balance Sheets
(dollars in thousands)

	September 30,			December 31,
	2008			2007
	(Unaudited)
Assets
Investments:
Fixed maturity securities	$	9,414,529		$	9,840,291
Equity securities available for sale		469,719			726,562
Arbitrage trading account		263,387			301,786
Investment in arbitrage funds		212,218			210,740
Partnerships and affiliates		550,292			545,937
Loans receivable		308,181			268,206
Total investments		11,218,326			11,893,522
Cash and cash equivalents		1,003,875			951,863
Premiums and fees receivable		1,155,685			1,199,002
Due from reinsurers		945,015			904,509
Accrued investment income		114,296			134,872
Prepaid reinsurance premiums		188,061			179,495
Deferred policy acquisition costs		434,928			455,244
Real estate, furniture and equipment		218,608			204,252
Deferred Federal and foreign income taxes		337,362			186,669
Goodwill		106,591			102,462
Trading account receivable from brokers and clearing organizations		395,391			409,926
Other assets		299,572			210,354
Total assets	$	16,417,710		$	16,832,170
Liabilities and Stockholders’ Equity
Liabilities:
Reserves for losses and loss expenses	$	9,076,876		$	8,678,034
Unearned premiums		2,132,638			2,240,690
Due to reinsurers		108,767			108,178
Trading account securities sold but not yet purchased		57,020			67,139
Other liabilities		713,429			761,690
Junior subordinated debentures		249,533			249,375
Senior notes and other debt		1,024,758			1,121,793
Total liabilities		13,363,021			13,226,899
Minority interest		5,248			35,496
Stockholders’ equity:
Preferred stock, par value $.10 per share:
Authorized 5,000,000 shares; issued and outstanding — none		—			—
Common stock, par value $.20 per share:
Authorized 500,000,000 shares, issued and outstanding, net of treasury shares, 162,149,253 and 180,320,775 shares		47,024			47,024
Additional paid-in capital		915,756			907,016
Retained earnings		3,461,294			3,248,762
Accumulated other comprehensive income (loss)		(180,766	)		53,201
Treasury stock, at cost, 72,968,665 and 54,797,143 shares		(1,193,867	)		(686,228	)
Total stockholders’ equity		3,049,441			3,569,775
Total liabilities and stockholders’ equity	$	16,417,710		$	16,832,170

See accompanying notes to interim consolidated financial statements.

2

W. R. Berkley Corporation and Subsidiaries
Consolidated Statements of Income (Unaudited)
(amounts in thousands, except per share data)

	For the Three Months						For the Nine Months
	Ended September 30,						Ended September 30,
	2008			2007			2008			2007
Revenues:
Net premiums written	$	996,333		$	1,132,489		$	3,145,447		$	3,524,025
Change in unearned premiums		58,908			43,075			108,814			(21,888	)
Net premiums earned		1,055,241			1,175,564			3,254,261			3,502,137
Net investment income		153,402			165,790			451,838			500,154
Insurance service fees		25,628			23,690			77,501			75,026
Realized investment gains (losses)		(220,030	)		812			(248,167	)		13,482
Revenues from wholly-owned investees		40,496			41,739			92,515			61,227
Other income		893			437			2,025			1,610
Total revenues		1,055,630			1,408,032			3,629,973			4,153,636
Expenses:
Losses and loss expenses		694,254			706,374			2,056,998			2,095,190
Other operating expenses		358,580			382,530			1,115,002			1,139,755
Expenses from wholly-owned investees		39,337			38,718			90,615			56,515
Interest expense		20,251			22,707			64,391			66,107
Total expenses		1,112,422			1,150,329			3,327,006			3,357,567
Income (loss) before income taxes and minority interest		(56,792	)		257,703			302,967			796,069
Income tax benefit (expense)		28,964			(76,344	)		(61,915	)		(234,855	)
Minority interest		(52	)		(896	)		(237	)		(1,692	)
Net income (loss)	$	(27,880	)	$	180,463		$	240,815		$	559,522
Earnings (loss) per share:
Basic	$	(.17	)	$	.97		$	1.43		$	2.93
Diluted	$	(.17	)	$	.93		$	1.37		$	2.81

See accompanying notes to interim consolidated financial statements.

3

W. R. Berkley Corporation and Subsidiaries
Consolidated Statements of Stockholders’ Equity (Unaudited)
(dollars in thousands)

	For The Nine Months
	Ended September 30,
	2008			2007
Common stock:
Beginning and end of period	$	47,024		$	47,024
Additional paid in capital:
Beginning of period	$	907,016		$	859,787
Stock options exercised, including tax benefits		(9,093	)		26,929
Restricted stock units expensed		17,381			14,092
Stock options expensed		160			596
Stock issued to directors and others		292			384
End of period	$	915,756		$	901,788
Retained earnings:
Beginning of period	$	3,248,762		$	2,542,744
Net income		240,815			559,522
Dividends		(28,283	)		(28,614	)
End of period	$	3,461,294		$	3,073,652
Accumulated other comprehensive income (loss), net of tax:
Unrealized investment gains (losses):
Beginning of period	$	52,497		$	121,961
Net change in period		(206,973	)		(38,845	)
End of period		(154,476	)		83,116
Currency translation adjustments:
Beginning of period	$	18,060		$	3,748
Net change in period		(28,477	)		17,787
End of period		(10,417	)		21,535
Net pension asset:
Beginning of period	$	(17,356	)	$	(14,096	)
Net change in period		1,483			926
End of period		(15,873	)		(13,170	)
Total accumulated other comprehensive income (loss)	$	(180,766	)	$	91,481
Treasury stock:
Beginning of period	$	(686,228	)	$	(226,009	)
Stock repurchases		(534,584	)		(395,977	)
Stock options exercised		26,146			24,654
Stock issued to directors and others		799			117
End of period	$	(1,193,867	)	$	(597,215	)

See accompanying notes to interim consolidated financial statements.

4

W. R. Berkley Corporation and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
(dollars in thousands)

	For the Nine Months
	Ended September 30,
	2008			2007
Cash from operating activities:
Net income	$	240,815		$	559,522
Adjustments to reconcile net income to net cash flows from operating activities:
Realized investment (gains) losses		248,167			(13,482	)
Depreciation and amortization		60,359			61,848
Minority interest		237			1,692
Equity in undistributed earnings of partnerships and affiliates		(26,327	)		(23,043	)
Stock incentive plans		18,190			15,421
Change in:
Trading account securities and related accounts		38,399			(51,694	)
Investment in arbitrage funds		(1,478	)		(19,497	)
Trading account receivables from broker and clearing organization		14,535			36,306
Trading account securities sold but not yet purchased		(10,119	)		(23,924	)
Premiums and fees receivable		35,832			(47,158	)
Due from reinsurers		(42,939	)		23,472
Accrued investment income		20,239			(12,468	)
Prepaid reinsurance premiums		(10,495	)		(13,837	)
Deferred policy acquisition costs		18,157			(12,070	)
Deferred income taxes		(40,794	)		9,040
Other assets		2,024			(22,670	)
Reserves for losses and loss expenses		428,373			648,043
Unearned premiums		(97,987	)		36,375
Due to reinsurers		5,556			(25,352	)
Other liabilities		(120,892	)		3,525
Net cash from operating activities		779,852			1,130,049
Cash flows used in investing activities:
Proceeds from sales, excluding trading account:
Fixed maturity securities		765,460			1,372,540
Equity securities		132,731			321,257
Maturities and prepayments of fixed maturity securities		1,005,827			984,504
Distributions from partnerships and affiliates		191,082			81,437
Cost of purchases, excluding trading account:
Fixed maturity securities and loans receivable		(1,752,366	)		(3,299,106	)
Equity securities		(185,561	)		(469,428	)
Investments in partnerships and affiliates		(119,460	)		(92,649	)
Change in balances due to/from brokers		(25,006	)		24,979
Net additions to real estate, furniture and equipment		(29,098	)		(21,388	)
Payment for business purchased, net of cash acquired		(47,622	)		(61,851	)
Proceeds from sale of business, net of cash divested		—			(2,061	)
Net cash used in investing activities		(64,013	)		(1,161,766	)
Cash flows used in financing activities:
Stock repurchases		(534,584	)		(395,977	)
Net proceeds from issuance of senior notes and other debt		3,000			246,644
Repayment of senior notes and other debt		(103,484	)		(704	)
Cash dividends		(37,897	)		(27,104	)
Bank deposits received		15,657			10,215
Advances from (repayments to) Federal Home Loan Bank		7,450			(2,075	)
Net proceeds from stock options exercised		12,629			23,702
Proceeds from (purchase of) minority shares		77			(33	)
Other		—			3,431
Net cash used in financing activities		(637,152	)		(141,901	)
Changes in cash due to foreign exchange rates		(26,675	)		10,650
Net increase (decrease) in cash and cash equivalents		52,012			(162,968	)
Cash and cash equivalents at beginning of year		951,863			754,247
Cash and cash equivalents at end of period	$	1,003,875		$	591,279
Supplemental disclosure of cash flow information:
Interest paid	$	74,300		$	62,530
Federal income taxes paid, net	$	171,693		$	202,933

See accompanying notes to interim consolidated financial statements.

5

W. R. Berkley Corporation and Subsidiaries
Notes to Interim Consolidated Financial Statements (Unaudited)

1.GENERAL

     The accompanying interim consolidated financial statements should be read in conjunction with the following notes and with the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007. Reclassifications have been made in the 2007 financial statements as originally reported to conform them to the presentation of the 2008 financial statements.

     The Company presents both basic and diluted earnings per share (EPS) amounts. Basic EPS is calculated by dividing net income by weighted average number of common shares outstanding during the period. Diluted EPS is based upon the weighted average number of common and common equivalent shares outstanding during the period and is calculated using the treasury stock method for stock incentive plans. Common equivalent shares are excluded from the computation in periods in which they have an anti-dilutive effect. Stock options for which the exercise price exceeds the average market price over the period have an anti-dilutive effect on EPS and, accordingly, are excluded from the calculation.

     The weighted average number of common shares used in the computation of basic and diluted earnings (loss) per share was as follows (amounts in thousands):

	For the Three Months				For the Nine Months
	Ended September 30,				Ended September 30,
	2008		2007		2008		2007
Average shares outstanding:
Basic		162,675		186,601		168,826		190,659
Diluted (1)		162,675		193,719		175,369		199,247

(1) For the three months ended September 30, 2008, the anti-dilutive effects of 6,086 potential common shares outstanding were excluded from the outstanding diluted shares due to the third quarter net loss.

     In the opinion of management, the financial information reflects all adjustments that are necessary for a fair presentation of financial position and results of operations for the interim periods. Seasonal weather variations and natural and man-made catastrophes can have a significant impact on the results of any one or more reporting periods.

6

2.COMPREHENSIVE INCOME (LOSS)

     The following is a reconciliation of comprehensive income (loss) (dollars in thousands):

	For the Three Months						For the Nine Months
	Ended September 30,						Ended September 30,
	2008			2007			2008			2007
Net income (loss)	$	(27,880	)	$	180,463		$	240,815		$	559,522
Other comprehensive income (loss):
Change in unrealized foreign exchange gains (losses)		(33,433	)		5,244			(28,477	)		17,787
Unrealized holding gains (losses) on investment securities arising during the period, net of taxes		(261,628	)		53,501			(368,301	)		(30,115	)
Reclassification adjustment for realized (gains) losses included in net income, net of taxes		143,020			(517	)		161,328			(8,730	)
Change in unrecognized pension obligation, net of income taxes		495			309			1,483			926
Other comprehensive income (loss)		(151,546	)		58,537			(233,967	)		(20,132	)
Comprehensive income (loss)	$	(179,426	)	$	239,000		$	6,848		$	539,390

3.INVESTMENTS

     At September 30, 2008 and December 31, 2007, investments in fixed maturity securities and equity securities available for sale were as follows (dollars in thousands):

			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
September 30, 2008
Fixed maturity securities
Held to maturity	$	126,092	$	6,162	$	(2,692	)	$	129,562
Available for sale		9,454,791		77,549		(243,903	)		9,288,437
Equity securities
Common stocks		129,217		53,173		(44,591	)		137,799
Preferred stocks		414,814		456		(83,350	)		331,920
Total	$	10,124,914	$	137,340	$	(374,536	)	$	9,887,718
December 31, 2007
Fixed maturity securities
Held to maturity	$	130,111	$	12,179	$	(64	)	$	142,226
Available for sale		9,602,984		140,419		(33,223	)		9,710,180
Equity securities
Common stocks		93,425		54,079		—			147,504
Preferred stocks		677,848		2,571		(101,361	)		579,058
Total	$	10,504,368	$	209,248	$	(134,648	)	$	10,578,968

7

3.INVESTMENTS CONTINUED

     The following table summarizes all securities in an unrealized loss position at September 30, 2008 and December 31, 2007 by the length of time those securities have been continuously in an unrealized loss position (dollars in thousands):

	Less Than 12 Months				12 Months or Greater				Total
			Unrealized				Unrealized				Unrealized
	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
September 30, 2008
U.S. government and agency	$	341,770	$	3,254	$	29,903	$	610	$	371,673	$	3,864
State and municipal		2,803,960		71,012		441,685		36,773		3,245,645		107,785
Mortgage-backed securities		598,048		27,708		231,350		25,071		829,398		52,779
Corporate		498,199		42,456		261,765		37,793		759,964		80,249
Foreign		42,005		1,918		—		—		42,005		1,918
Fixed maturity securities		4,283,982		146,348		964,703		100,247		5,248,685		246,595
Common stocks		59,573		44,591		—		—		59,573		44,591
Preferred stocks		158,221		54,475		59,846		28,875		218,067		83,350
Total	$	4,501,776	$	245,414	$	1,024,549	$	129,122	$	5,526,325	$	374,536
December 31, 2007
U.S. government and agency	$	28,059	$	160	$	16,770	$	989	$	44,829	$	1,149
State and municipal		439,307		6,711		517,768		5,808		957,075		12,519
Mortgage-backed securities		212,769		3,040		488,392		6,242		701,161		9,282
Corporate		169,732		4,940		262,731		4,406		432,463		9,346
Foreign		57,129		985		14,807		6		71,936		991
Fixed maturity securities		906,996		15,836		1,300,468		17,451		2,207,464		33,287
Preferred stocks		465,933		94,188		39,600		7,173		505,533		101,361
Total	$	1,372,929	$	110,024	$	1,340,068	$	24,624	$	2,712,997	$	134,648

     At September 30, 2008, gross unrealized losses for fixed maturity securities were $247 million. All of these securities are classified as available for sale. In assessing other than temporary impairments of fixed maturity securities, the Company assesses the issuer’s ability to continue to meet its contractual payment obligations as they become due and the Company’s ability and intent to hold the investment until it recovers or matures. Management believes these unrealized losses are due primarily to temporary market and sector-related factors rather than to issuer-specific factors.

     At September 30, 2008, gross unrealized losses for preferred stocks were $83 million. All of these securities are classified as available for sale. The Company has the ability and intent to hold these securities at least until the investment impairment is recovered. In assessing other than temporary impairments of perpetual preferred stocks, the Company applies an impairment model similar to that used for a fixed maturity security provided there has been no evidence of deterioration in the credit of the issuer. The preferred securities in an unrealized loss position are investment grade securities issued by banks, insurers and real estate investment trusts (“REITs”). Management believes these unrealized losses are due primarily to temporary market and sector-related factors rather than to issuer-specific factors.

     At September 30, 2008, the Company owned one common stock in an unrealized loss position. The stock, which was issued by a REIT, had a fair value of $60 million and an unrealized loss of $45 million. The stock has been in an unrealized loss position for less than six months. Management believes this unrealized loss is due primarily to temporary market and sector-related factors rather than to issuer-specific factors.

     Write downs for other-than-temporary impairments were $329 million in the first nine months of 2008. These impairment charges included $263 million from the write down of preferred stocks issued by Fannie Mae and Freddie Mac, which were placed into conservatorship in September 2008. Impairment losses also included $58 million for preferred stocks issued by banks, insurers and REITs and $8 million for a private equity investment.

8

4.FAIR VALUE MEASUREMENTS

     On January 1, 2008, the Company adopted Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“FAS 157”), which was issued by the Financial Accounting Standards Board in September 2006. FAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. The adoption of FAS 157 did not have a material impact on the Company’s financial condition or results of operations.

     FAS 157 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable inputs for the asset or liability. Unobservable inputs may only be used to measure fair value to the extent that observable inputs are not available.

     Because many fixed income securities do not trade on a daily basis, the Company utilizes pricing models and processes which may include benchmark curves, benchmarking of like securities, sector groupings and matrix pricing. Market inputs used to evaluate securities include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data. Quoted prices are often unavailable for recently issued securities, securities that are infrequently traded or securities that are only traded in private transactions. For publicly traded securities for which quoted prices are unavailable, the Company determines fair value based on independent broker quotations and other observable market data. For securities traded only in private negotiations, the Company determines fair value based primarily on the cost of such securities, which is adjusted to reflect prices of recent placements of securities of the same issuer, financial data, projections and business developments of the issuer and other relevant information.

     The following table presents the assets and liabilities measured at fair value on a recurring basis as of September 30, 2008 by level (dollars in thousands):

	Total		Level 1		Level 2		Level 3
Assets:
Fixed maturity securities available for sale	$	9,288,437	$	—	$	9,083,656	$	204,781
Equity securities available for sale		469,719		76,975		280,210		112,534
Arbitrage trading account		263,387		201,630		61,404		353
Total assets	$	10,021,543	$	278,605	$	9,425,270	$	317,668
Liabilities:
Securities sold but not yet purchased	$	57,020	$	57,020	$	—	$	—

9

4.FAIR VALUE MEASURES — CONTINUED

     The following table summarizes changes in Level 3 assets (dollars in thousands):

							Equity
							Securities		Arbitrage
				Fixed			Available		Trading
	Total			Maturities			for Sale		Account
Balance as of January 1, 2008	$	90,918		$	23,725		$	62,911	$	4,282
Realized and unrealized gains and losses:
Included in earnings		(4,589	)		(4,589	)		—		—
Included in other comprehensive loss		(3,160	)		(11,458	)		8,298		—
Purchases, sales and maturities, net		105,786			68,743			41,325		(4,282	)
Transfer in of securities for which observable inputs are no longer available		128,713			128,360			—		353
Balance as of September 30, 2008	$	317,668		$	204,781		$	112,534	$	353

5.REINSURANCE CEDED

     The Company reinsures a portion of its exposures principally to reduce its net liability on individual risks and to protect against catastrophic losses. Estimated amounts due from reinsurers are reported net of reserves for uncollectible reinsurance of $3.6 million and $2.9 million as of September 30, 2008 and December 31, 2007, respectively. The following amounts arising under reinsurance ceded contracts have been deducted in arriving at the amounts reflected in the statements of income (dollars in thousands):

	For the Three Months				For the Nine Months
	Ended September 30,				Ended September 30,
	2008		2007		2008		2007
Ceded premiums earned	$	131,491	$	123,597	$	372,243	$	355,654
Ceded losses incurred	$	151,578	$	71,631	$	240,501	$	207,755

6.INCOME TAXES

     The income tax provision has been computed based on the Company’s estimated annual effective tax rate, which differs from the federal income tax rate of 35% principally because of tax-exempt investment income.

     As of September 30, 2008, the deferred tax asset includes amounts related to unrealized investment losses and impaired securities of $87 million and $82 million, respectively. Realization of the deferred tax asset is dependent upon the Company’s prior period capital gains available for carryback and its ability to generate sufficient taxable capital gains in future carryforward periods. Management anticipates that future taxable capital gains will be sufficient for the realization of this asset.

10

7.INDUSTRY SEGMENTS

     The Company’s operations are presently conducted in five segments of the insurance business: specialty lines of insurance, regional property casualty insurance, alternative markets, reinsurance and international.

     Our specialty segment underwrites complex and sophisticated third-party liability risks, principally within the excess and surplus lines. The primary lines of business are premises operations, commercial automobile, property lines, product liability and professional liability. The companies within the segment are divided along the different customer bases and product lines that they serve. The specialty units deliver their products through a variety of distribution channels depending on the customer base and particular risks insured. The customers in this segment are highly diverse.

     Our regional segment provides commercial insurance products to customers primarily in 44 states. Key clients of this segment are small-to-mid-sized businesses and state and local governmental entities. The regional subsidiaries are organized geographically, which provides them with the flexibility to adapt to local market conditions, while enjoying the superior administrative capabilities and financial strength of the Company. The regional operations are organized geographically based on markets served.

     Our alternative markets segment specializes in developing, insuring, reinsuring and administering self-insurance programs and other alternative risk transfer mechanisms. Its clients include employers, employer groups, insurers and alternative market funds seeking less costly, more efficient ways to manage exposure to risks. In addition to providing insurance, the alternative markets segment also provides a wide variety of fee-based services, including consulting and administrative services.

     Our reinsurance segment specializes in underwriting property casualty reinsurance on both a treaty and a facultative basis. The principal reinsurance units are facultative reinsurance, which writes individual certificates and program facultative business, treaty reinsurance, which functions as a traditional reinsurer in specialty and standard reinsurance lines, and Lloyd’s reinsurance, which writes property and casualty reinsurance through Lloyd’s.

     Our international segment offers personal and commercial property casualty insurance in South America and commercial insurance and reinsurance in the United Kingdom, Continental Europe, Australia and Hong Kong.

     The accounting policies of the segments are the same as those described in the summary of significant accounting policies. Income tax expense and benefits are calculated based upon the Company’s overall effective tax rate on investment income plus the statutory rate on non-investment income.

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7.INDUSTRY SEGMENTS (continued)

     Summary financial information about the Company’s operating segments is presented in the following table. Net income by segment consists of revenues less expenses related to the respective segment’s operations, including allocated investment income. Identifiable assets by segment are those assets used in or allocated to the operation of each segment.

	Revenues
											Pre-tax			Net
	Earned		Investment								Income			Income
(dollars in thousands)	Premiums		Income		Other			Total			(Loss)			(Loss)
For the three months ended September 30, 2008:
Specialty	$	389,967	$	54,512	$	901		$	445,380		$	87,147		$	63,886
Regional		306,892		23,594		—			330,486			17,894			14,764
Alternative markets		157,149		30,526		24,730			212,405			51,800			37,722
Reinsurance		124,710		33,675		—			158,385			29,540			23,674
International		76,523		9,657		—			86,180			13,440			8,221
Corporate and eliminations and other (1)		—		1,438		(178,644	)		(177,206	)		(256,613	)		(176,147	)
Consolidated	$	1,055,241	$	153,402	$	(153,013	)	$	1,055,630		$	(56,792	)	$	(27,880	)
For the three months ended September 30, 2007
Specialty	$	441,944	$	56,392	$	—		$	498,336		$	124,391		$	86,620
Regional		315,358		23,939		—			339,297			53,507			37,226
Alternative markets		165,686		31,096		23,690			220,472			60,006			42,182
Reinsurance		190,559		36,067		—			226,626			44,894			32,876
International		62,017		9,445		—			71,462			11,306			7,868
Corporate and eliminations and other (1)		—		8,851		42,988			51,839			(36,401	)		(26,309	)
Consolidated	$	1,175,564	$	165,790	$	66,678		$	1,408,032		$	257,703		$	180,463

(1) Corporate and eliminations and other represent corporate revenues and expenses, realized investment gains and losses and other items that are not allocated to business segments.

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7.INDUSTRY SEGMENTS (continued)

	Revenues
											Pre-tax			Net
	Earned		Investment								Income			Income
(dollars in thousands)	Premiums		Income		Other			Total			(Loss)			(Loss)
For the nine months ended September 30, 2008:
Specialty	$	1,228,720	$	160,852	$	2,921		$	1,392,493		$	308,662		$	221,493
Regional		927,585		68,909		—			996,494			80,973			61,570
Alternative markets		468,243		88,730		74,589			631,562			165,480			119,070
Reinsurance		408,911		99,132		—			508,043			96,473			75,565
International		220,802		28,007		—			248,809			31,365			18,934
Corporate and eliminations and other (1)		—		6,208		(153,636	)		(147,428	)		(379,986	)		(255,817	)
Consolidated	$	3,254,261	$	451,838	$	(76,126	)	$	3,629,973		$	302,967		$	240,815
For the nine months ended September 30, 2007:
Specialty	$	1,327,509	$	170,868	$	—		$	1,498,377		$	388,946		$	269,902
Regional		929,537		71,849		—			1,001,386			160,731			111,660
Alternative markets		487,616		93,624		75,026			656,266			191,316			133,718
Reinsurance		572,823		116,625		—			689,448			137,193			100,838
International		184,652		26,045		—			210,697			26,577			18,170
Corporate and eliminations and other (1)		—		21,143		76,319			97,462			(108,694	)		(74,766	)
Consolidated	$	3,502,137	$	500,154	$	151,345		$	4,153,636		$	796,069		$	559,522

(1) Corporate and eliminations and other represent corporate revenues and expenses, realized investment gains and losses and other items that are not allocated to business segments.

     Identifiable assets by segment are as follows (dollars in thousands):

	September 30,			December 31,
	2008			2007
Specialty	$	5,643,839		$	5,887,363
Regional		2,709,379			2,717,199
Alternative markets		3,490,353			3,261,318
Reinsurance		4,419,004			4,912,732
International		956,534			870,404
Corporate and eliminations		(801,399	)		(816,846	)
Consolidated	$	16,417,710		$	16,832,170

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7.INDUSTRY SEGMENTS (continued)

Net premiums earned by major line of business are as follows (dollars in thousands):

	For the Three Months				For the Nine Months
	Ended September 30,				Ended September 30,
	2008		2007		2008		2007
Premises operations	$	139,579	$	180,607	$	458,254	$	550,431
Automobile		67,785		70,608		203,017		208,672
Property		47,295		54,875		156,834		155,263
Products liability		43,172		55,471		142,047		173,603
Professional liability		38,221		38,812		116,418		116,311
Other		53,915		41,571		152,150		123,229
Specialty		389,967		441,944		1,228,720		1,327,509
Commercial multiple peril		111,492		118,576		341,028		353,669
Automobile		91,153		93,323		272,989		271,132
Workers’ compensation		61,795		62,552		188,593		187,724
Other		42,452		40,907		124,975		117,012
Regional		306,892		315,358		927,585		929,537
Excess workers’ compensation		73,327		79,838		214,594		233,390
Primary workers’ compensation		60,473		62,647		183,055		188,311
Other		23,349		23,201		70,594		65,915
Alternative markets		157,149		165,686		468,243		487,616
Casualty		109,294		155,599		350,145		479,946
Property		15,416		34,960		58,766		92,877
Reinsurance		124,710		190,559		408,911		572,823
International		76,523		62,017		220,802		184,652
Total	$	1,055,241	$	1,175,564	$	3,254,261	$	3,502,137

8.COMMITMENTS, LITIGATION AND CONTINGENT LIABILITIES

     The Company’s subsidiaries are subject to disputes, including litigation and arbitration, arising in the ordinary course of their insurance and reinsurance businesses. The Company’s estimates of the costs of settling such matters are reflected in its aggregate reserves for losses and loss expenses, and the Company does not believe that the ultimate outcome of such matters will have a material adverse effect on its financial condition or results of operations. However, adverse outcomes are possible and could negatively impact the Company’s financial condition and results of operations.

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SAFE HARBOR STATEMENT

     This is a “Safe Harbor” Statement under the Private Securities Litigation Reform Act of 1995. This document may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Some of the forward-looking statements can be identified by the use of forward-looking words such as ‘believes,” “expects,” “potential,” “continued,” “may,” “will,” “should,” “seeks,” “approximately,” “predicts,” “intends,” “plans,” “estimates,” “anticipates,” or the negative version of those words or other comparable words. Any forward-looking statements contained herein, including statements related to our outlook for the industry and for our performance for the year 2008 and beyond, are based upon the Company’s historical performance and on current plans, estimates and expectations. The inclusion of this forward-looking information should not be regarded as a representation by us or any other person that the future plans, estimates or expectations contemplated by us will be achieved. They are subject to various risks and uncertainties, including but not limited to, the cyclical nature of the property casualty industry, the long-tail and potentially volatile nature of the insurance and reinsurance business, product demand and pricing, claims development and the process of estimating reserves, the uncertain nature of damage theories and loss amounts, natural and man-made catastrophic losses, including as a result of terrorist activities, the impact of significant and increasing competition, the success of our new ventures or acquisitions and the availability of other opportunities, the availability of reinsurance, exposure as to coverage for terrorist acts, our retention under the Terrorism Risk Insurance Program Reauthorization Act of 2007, the ability of our reinsurers to pay reinsurance recoverables owed to us, the potential impact of the current conditions in the financial markets on our results and financial condition, particularly if such conditions continue, the potential impact of current legislative, regulatory, accounting and other initiatives taken or which may be taken in response to the current conditions in the financial markets, investment risks, including those of our portfolio of fixed income securities and investments in equity securities, including investments in financial institutions, merger arbitrage and private equity investments, exchange rate and political risks relating to our international operations, other legislative and regulatory developments, including those related to alleged anti-competitive or other improper business practices in the insurance or reinsurance industry, changes in the ratings assigned to us or our insurance company subsidiaries by ratings agencies, the availability of dividends from our insurance company subsidiaries, our ability to attract and retain qualified employees, and other risks detailed from time to time in the Company’s filings with the Securities and Exchange Commission (“SEC”). These risks and uncertainties could cause actual results of the industry or our actual results for the year 2008 and beyond to differ materially from those expressed in any forward-looking statement made by or on behalf of the Company. Any projections of growth in the Company’s net premiums written and management fees would not necessarily result in commensurate levels of underwriting and operating profits. Our future financial performance is dependent upon factors discussed elsewhere in this Form 10-Q and our other SEC filings. Forward-looking statements speak only as of the date on which they are made.

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Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

     W. R. Berkley Corporation is an insurance holding company that is among the largest commercial lines writers in the United States and operates in five business segments: specialty insurance, regional property casualty insurance, alternative markets, reinsurance and international. The Company’s primary sources of revenues and earnings are insurance and investments.

     The profitability of the Company’s insurance business is affected primarily by the adequacy of premium rates. The ultimate adequacy of premium rates is not known with certainty at the time a property casualty insurance policy is issued because premiums are determined before claims are reported. The ultimate adequacy of premium rates is affected mainly by the severity and frequency of claims, which are influenced by many factors, including natural and other disasters, regulatory measures and court decisions that define and change the extent of coverage and the effects of economic inflation on the amount of compensation due for injuries or losses. General insurance prices are also influenced by available insurance capacity, i.e., the level of policyholders’ surplus employed in the industry, and the industry’s willingness to deploy that capital.

     Available insurance capacity has increased in recent years, increasing competition in the industry and putting downward pressure on pricing and terms and conditions. In 2007, we saw increased competition and decreased prices across most of our business segments. This trend of increased competition and decreased prices has continued in 2008 and, although there are signs of it beginning to ease, we expect it to continue in 2009.

     The Company’s profitability is also affected by its investment income. The Company’s invested assets, which are derived from its own capital and cash flow from its insurance business, are invested principally in fixed maturity securities. The return on fixed maturity securities is affected primarily by general interest rates and the credit quality and duration of the securities. The Company also invests in equity securities, including those of financial institutions, merger arbitrage, private equity investments and real estate securities.

Critical Accounting Estimates

     The following presents a discussion of accounting policies and estimates relating to reserves for losses and loss expenses, assumed premiums and investments. Management believes these policies and estimates are the most critical to its operations and require the most difficult, subjective and complex judgments.

     Reserves for Losses and Loss Expenses. To recognize liabilities for unpaid losses, either known or unknown, insurers establish reserves, which is a balance sheet account representing estimates of future amounts needed to pay claims and related expenses with respect to insured events which have occurred. Estimates and assumptions relating to reserves for losses and loss expenses are based on complex and subjective judgments, often including the interplay of specific uncertainties with related accounting and actuarial measurements. Such estimates are also susceptible to change as significant periods of time may elapse between the occurrence of an insured loss, the report of the loss to the insurer, the ultimate determination of the cost of the loss and the insurer’s payment of that loss.

     In general, when a claim is reported, claims personnel establish a “case reserve” for the estimated amount of the ultimate payment. The estimate represents an informed judgment based on general reserving practices and reflects the experience and knowledge of the claims personnel regarding the nature and value of the specific type of claim. Reserves are also established on an aggregate basis to provide for losses incurred but not reported (“IBNR”) to the insurer, potential inadequacy of case reserves and the estimated expenses of settling claims, including legal and other fees and general expenses of administrating the claims adjustment process. Reserves are established based upon the then current legal interpretation of coverage provided.

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     In examining reserve adequacy, several factors are considered in addition to the economic value of losses. These factors include historical data, legal developments, changes in social attitudes and economic conditions, including the effects of inflation. The actuarial process relies on the basic assumption that past experience, adjusted judgmentally for the effects of current developments and anticipated trends, is an appropriate basis for predicting future outcomes. Reserve amounts are necessarily based on management’s informed estimates and judgments using currently available data. As additional experience and other data become available and are reviewed, these estimates and judgments may be revised. This may result in reserve increases or decreases that would be reflected in our results in periods in which such estimates and assumptions are changed.

     Reserves do not represent an exact calculation of liability. Rather, reserves represent an estimate of what management expects the ultimate settlement and claim administration will cost. While the methods for establishing the reserves are well tested over time, some of the major assumptions about anticipated loss emergence patterns are subject to unanticipated fluctuation. These estimates, which generally involve actuarial projections, are based on management’s assessment of facts and circumstances then known, as well as estimates of future trends in claims severity and frequency, judicial theories of liability and other factors, including the actions of third parties which are beyond the Company’s control. These variables are affected by external and internal events, such as inflation and economic volatility, judicial and litigation trends, reinsurance coverage, legislative changes and claim handling and reserving practices, which make it more difficult to accurately predict claim costs. The inherent uncertainties of estimating reserves are greater for certain types of liabilities where long periods of time elapse before a definitive determination of liability is made. Because setting reserves is inherently uncertain, the Company cannot assure that its current reserves will prove adequate in light of subsequent events.

     Loss reserves included in the Company’s financial statements represent management’s best estimates based upon an actuarially derived point estimate and other considerations. The Company uses a variety of actuarial techniques and methods to derive an actuarial point estimate for each operating unit. These methods include paid loss development, incurred loss development, paid and incurred Bornhuetter-Ferguson methods and frequency and severity methods. In circumstances where one actuarial method is considered more credible than the others, that method is used to set the point estimate. For example, the paid loss and incurred loss development methods rely on historical paid and incurred loss data. For new lines of business, where there is insufficient history of paid and incurred claims data, or in circumstances where there have been significant changes in claim practices, the paid and incurred loss development methods would be less credible than other actuarial methods. The actuarial point estimate may also be based on a judgmental weighting of estimates produced from each of the methods considered. Industry loss experience is used to supplement the Company’s own data in selecting “tail factors” and in areas where the Company’s own data is limited. The actuarial data is analyzed by line of business, coverage and accident or policy year, as appropriate, for each operating unit.

     The establishment of the actuarially derived loss reserve point estimate also includes consideration of qualitative factors that may affect the ultimate losses. These qualitative considerations include, among others, the impact of re-underwriting initiatives, changes in the mix of business, changes in distribution sources and changes in policy terms and conditions. Examples of changes in terms and conditions that can have a significant impact on reserve levels are the use of aggregate policy limits, the expansion of coverage exclusions, whether or not defense costs are within policy limits, and changes in deductibles and attachment points.

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     The key assumptions used to arrive at the best estimate of loss reserves are the expected loss ratios, rate of loss cost inflation, and reported and paid loss emergence patterns. Expected loss ratios represent management’s expectation of losses at the time the business is written, before any actual claims experience has emerged. This expectation is a significant determinant of the estimate of loss reserves for recently written business where there is little paid or incurred loss data to consider. Expected loss ratios are generally derived from historical loss ratios adjusted for the impact of rate increases, loss cost trends and known changes in the type of risks underwritten. Expected loss ratios are estimated for each key line of business within each operating unit. Expected loss cost inflation is particularly important for the long-tail lines, such as excess casualty, and claims with a high medical component, such as workers’ compensation. Reported and paid loss emergence patterns are used to project current reported or paid loss amounts to their ultimate settlement value. Loss development factors are based on the historical emergence patterns of paid and incurred losses, and are derived from the Company’s own experience and industry data. The paid loss emergence pattern is also significant to excess and assumed workers’ compensation reserves because those reserves are discounted to their estimated present value based upon such estimated payout patterns. Management believes the estimates and assumptions it makes in the reserving process provide the best estimate of the ultimate cost of settling claims and related expenses with respect to insured events which have occurred; however, different assumptions and variables could lead to significantly different reserve estimates.

     Loss frequency and severity are measures of loss activity that are considered in determining the key assumptions described in our discussion of loss and loss expense reserves, including expected loss ratios, rate of loss cost inflation and reported and paid loss emergence patterns. Loss frequency is a measure of the number of claims per unit of insured exposure, and loss severity is a measure of the average size of claims. Factors affecting loss frequency include the effectiveness of loss controls and safety programs and changes in economic activity or weather patterns. Factors affecting loss severity include changes in policy limits, retentions, rate of inflation and judicial interpretations.

     Another factor affecting estimates of loss frequency and severity is the loss reporting lag, which is the period of time between the occurrence of a loss and the date the loss is reported to the Company. The length of the loss reporting lag affects our ability to accurately predict loss frequency (loss frequencies are more predictable for lines with short reporting lags) as well as the amount of reserves needed for incurred but not reported losses (less IBNR is required for lines with short reporting lags). As a result, loss reserves for lines with short reporting lags are likely to have less variation from initial loss estimates. For lines with short reporting lags, which include commercial automobile, primary workers’ compensation, commercial multi-peril business, other liability (claims-made) and property business, the key assumption is the loss emergence pattern used to project ultimate loss estimates from known losses paid or reported to date. For lines of business with long reporting lags, which include other liability (occurrence), products liability, excess workers’ compensation and liability reinsurance, the key assumption is the expected loss ratio since there is often little paid or incurred loss data to consider.

     Historically, the Company has experienced less variation from its initial loss estimates for lines of businesses with short reporting lags than for lines of business with long reporting lags. For example, as of December 31, 2007, initial loss estimates for accident years 1998 through 2006 were increased by an average of 2% for lines with short reporting lags and by an average of 16% for lines with long reporting lags. For the latest accident year ended December 31, 2007, initial loss estimates were $1.8 billion for lines with short reporting lags and $1.0 billion for lines with long reporting lags.

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     The key assumptions used in calculating the most recent estimate of the loss reserves are reviewed each quarter and adjusted, to the extent necessary, to reflect historical changes, current trends and other factors observed. If the actual level of loss frequency and severity are higher or lower than expected, the ultimate losses will be different than management’s estimate. The following table reflects the impact of changes (which could be favorable or unfavorable) in frequency and severity on our loss estimate for claims occurring in 2007 (dollars in thousands):

	Frequency (+/-)
Severity (+/-)	1%		5%		10%
1%	$	57,037	$	171,678	$	314,979
5%		171,678		290,859		439,835
10%		314,979		439,835		595,906

     Our net reserves for losses and loss expenses of $8.2 billion as of September 30, 2008 relate to multiple accident years. Therefore, the impact of changes in frequency or severity for more than one accident year could be higher or lower than the amounts reflected above.

     Approximately $1.9 billion, or 23%, of the Company’s net loss reserves as of September 30, 2008 relate to assumed reinsurance business. There is a higher degree of uncertainty and greater variability regarding estimates of assumed loss reserves because those estimates are based, in part, upon information received from ceding companies. If information received from ceding companies is not timely or correct, the Company’s estimate of ultimate losses may not be accurate. Furthermore, due to delayed reporting of claim information by ceding companies, the claim settlement tail for assumed reinsurance is extended. Management considers the impact of delayed reporting in its selection of assumed loss development factors.

     Information received from ceding companies is used to set initial expected loss ratios, to establish case reserves and to estimate reserves for incurred but not reported losses on assumed reinsurance business. This information, which is generally provided through reinsurance intermediaries, is gathered through the underwriting process and from periodic claim reports and other correspondence with ceding companies. The Company performs underwriting and claim audits of selected ceding companies to determine the accuracy and completeness of information provided to the Company. The information received from the ceding companies is supplemented by the Company’s own loss development experience with similar lines of business as well as industry loss trends and loss development benchmarks.

     Following is a summary of the Company’s reserves for losses and loss expenses by business segment as of September 30, 2008 and December 31, 2007 (dollars in thousands):

	September 30,		December 31,
	2008		2007
Specialty	$	2,960,105	$	2,853,479
Regional		1,323,744		1,218,703
Alternative Markets		1,668,405		1,558,643
Reinsurance		1,888,430		1,884,051
International		335,547		308,021
Net reserves for losses and loss expenses		8,176,231		7,822,897
Ceded reserves for losses and loss expenses		900,645		855,137
Gross reserves for losses and loss expenses	$	9,076,876	$	8,678,034

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     Following is a summary of the Company’s net reserves for losses and loss expenses by major line of business as of September 30, 2008 and December 31, 2007 (dollars in thousands):

	Reported Case		Incurred But
	Reserves		Not Reported		Total
September 30, 2008
General liability	$	802,899	$	2,190,039	$	2,992,938
Workers’ compensation		975,716		996,235		1,971,951
Commercial automobile		390,080		224,714		614,794
International		158,373		177,174		335,547
Other		154,527		218,044		372,571
Total primary		2,481,595		3,806,206		6,287,801
Reinsurance		808,964		1,079,466		1,888,430
Total	$	3,290,559	$	4,885,672	$	8,176,231
December 31, 2007
General liability	$	756,121	$	2,095,913	$	2,852,034
Workers’ compensation		915,588		929,875		1,845,463
Commercial automobile		377,922		223,767		601,689
International		118,807		189,214		308,021
Other		135,221		196,418		331,639
Total primary		2,303,659		3,635,187		5,938,846
Reinsurance		795,922		1,088,129		1,884,051
Total	$	3,099,581	$	4,723,316	$	7,822,897

     For the nine months ended September 30, 2008, the Company reported losses and loss expenses of $2,057 million. Estimates for claims occurring in prior years decreased by $155 million ($152 million for primary business and $3 million for assumed reinsurance). On an accident year basis, the change in prior year reserves is comprised of an increase in estimates for claims occurring in accident years 2002 and prior of $54 million and a decrease in estimates for claims occurring in accident years 2003 through 2007 of $209 million. The changes in prior year loss reserve estimates are generally the result of ongoing analysis of recent loss development trends. Original estimates are increased or decreased as additional information becomes known regarding individual claims and aggregate claim trends.

     Case reserves for primary business increased 8% to $2.5 billion as a result of an 11% increase in the number of outstanding claims and a 3% decrease in the average case reserve per claim. Reserves for incurred but not reported losses for primary business increased 5% to $3.8 billion at September 30, 2008 from $3.6 billion at December 31, 2007. By segment, prior year reserves decreased by $92 million for specialty, $30 million for alternative markets, $23 million for regional and $7 million for international. By line of business, prior year reserves decreased by $99 million for general liability, $27 million for workers’ compensation, $13 million for commercial automobile and $13 million for property. The decrease in prior year reserves for general liability reflects the favorable loss reserve trends for excess and surplus lines for accident years 2003 through 2007.

     Case reserves for reinsurance business increased to $809 million at September 30, 2008 from $796 million at December 31, 2007. Reserves for incurred but not reported losses for reinsurance business decreased to $1,079 million at September 30, 2008 from $1,088 million at December 31, 2007. Prior year reserves decreased by $3 million.

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     Loss Reserve Discount. The Company discounts its liabilities for excess and assumed workers’ compensation business because of the long period of time over which losses are paid. Discounting is intended to appropriately match losses and loss expenses to income earned on investment securities supporting the liabilities. The expected losses and loss expense payout pattern subject to discounting was derived from the Company’s loss payout experience. For non-proportional business, reserves for losses and loss expenses have been discounted using risk-free discount rates determined by reference to the U.S. Treasury yield curve. These discount rates range from 3.7% to 6.5%, with a weighted average discount rate of 4.9%. For proportional business, reserves for losses and loss expenses have been discounted at the statutory rate permitted by the Department of Insurance of the State of Delaware of 2.6%. The aggregate net discount, after reflecting the effects of ceded reinsurance, was $846 million and $788 million as of September 30, 2008 and December 31, 2007, respectively.

     Assumed Reinsurance Premiums. The Company estimates the amount of assumed reinsurance premiums that it will receive under treaty reinsurance agreements at the inception of the contracts. These premium estimates are revised as the actual amount of assumed premiums is reported to the Company by the ceding companies. As estimates of assumed premiums are made or revised, the related amount of earned premium, commissions and incurred losses associated with those premiums are recorded. Estimated assumed premiums receivable were approximately $50 million and $69 million at September 30, 2008 and December 31, 2007, respectively. The assumed premium estimates are based upon terms set forth in the reinsurance agreement, information received from ceding companies during the underwriting and negotiation of the agreement, reports received from ceding companies and discussions and correspondence with reinsurance intermediaries. The Company also considers its own view of market conditions, economic trends and experience with similar lines of business. These premium estimates represent management’s best estimate of the ultimate premiums to be received under its assumed reinsurance agreements.

     Other Than Temporary Declines in the Value of Investments. The cost of securities is adjusted where appropriate to include a provision for decline in value which is considered to be other than temporary. An other than temporary decline is considered to occur in investments where there has been a sustained reduction in market value and where the Company does not expect the fair value to recover prior to the time of sale or maturity. Management regularly reviews securities that have a fair value less than cost to determine whether an other than temporary impairment has occurred. If a decline in value is considered other than temporary, the Company reduces the carrying value of the security and reports a realized loss on its statement of income.

     In determining whether declines in fair values of fixed maturity securities and perpetual preferred stocks are other than temporary, management assesses the issuer’s ability to continue to meet its contractual payment obligations as they become due and whether the Company has the ability and intent to hold the investment until it recovers or matures. The Company’s assessment of its intent to hold an investment until it recovers or matures is based on conditions at the time the assessment is made, including general market conditions, the Company’s overall investment strategy and management’s view of the underlying value of an investment relative to its current price.

     In determining whether declines in fair values of common stock are other than temporary, management assesses 1) the severity and duration of the impairment, 2) the historic and implied volatility of the security, 3) recoveries or additional declines in fair value subsequent to the balance sheet date, 4) the financial condition and near-term prospects of the issuer, 5) whether the market decline was affected by macroeconomic conditions or by specific information pertaining to an individual security and 6) the length of the forecasted recovery period.

21

     The following table provides a summary of all securities for which fair value is less than amortized cost at September 30, 2008 (dollars in thousands):

			Gross
	Aggregate		Unrealized
	Fair Value		Loss
Fixed maturity securities	$	5,248,685	$	246,595
Common stocks		59,573		44,591
Preferred stocks		218,067		83,350
Total	$	5,526,325	$	374,536

     The following table provides a summary of all fixed maturity securities for which unrealized losses were 20% or greater than amortized cost at September 30, 2008 by the length of time those securities have been continuously in an unrealized loss position (dollars in thousands):

Fixed Maturity Securities

					Gross
	Number of		Aggregate		Unrealized
	Securities		Fair Value		Loss
Unrealized Loss 20% or Greater
Less than six months		2	$	2,718	$	1,484
Six months to less than nine months		3		2,498		2,879
Nine months to less than twelve months		4		12,469		11,842
Twelve months or greater		7		89,132		36,651
Total		16	$	106,817	$	52,856

     At September 30, 2008, gross unrealized losses for fixed maturity securities were $247 million. All of these securities are classified as available for sale. In assessing other than temporary impairments of fixed maturity securities, the Company assesses the issuer’s ability to continue to meet its contractual payment obligations as they become due and the Company’s ability and intent to hold the investment until it recovers or matures. Management believes these unrealized losses are due primarily to temporary market and sector-related factors rather than to issuer-specific factors.

     The following table provides a summary of all preferred stocks for which unrealized losses were 20% or greater than amortized cost at September 30, 2008 by the length of time those securities have been continuously in an unrealized loss position (dollars in thousands):

Preferred Stocks

					Gross
	Number of		Aggregate		Unrealized
	Securities		Fair Value		Loss
Unrealized Loss 20% or Greater
Less than six months		4	$	32,908	$	13,144
Six months to less than nine months		10		25,013		11,283
Nine months to less than twelve months		2		23,875		21,004
Twelve months or greater		22		49,687		26,887
Total		38	$	131,483	$	72,318

22

     At September 30, 2008, gross unrealized losses for preferred stocks were $83 million. All of these securities are classified as available for sale. The Company has the ability and intent to hold these securities at least until the investment impairment is recovered. In assessing other than temporary impairments of perpetual preferred stocks, the Company applies an impairment model similar to that used for a fixed maturity security provided there has been no evidence of deterioration in credit of the issuer. The preferred stocks in an unrealized loss position are investment grade securities issued by banks, insurers and REITs. Management believes these unrealized losses are due primarily to temporary market and sector-related factors rather than to issuer-specific factors.

     At September 30, 2008, the Company owned one common stock in an unrealized loss position. The stock, which was issued by a REIT, had a fair value of $60 million and an unrealized loss of $45 million. The stock has been in an unrealized loss position for less than six months. Management believes this unrealized loss is due primarily to temporary market and sector-related factors rather than to issuer-specific factors.

     Write downs for other-than-temporary impairments were $329 million in the first nine months of 2008. These impairment charges included $263 million from the write down of preferred stocks issued by Fannie Mae and Freddie Mac, which were placed into conservatorship in September 2008. Impairment losses also included $58 million for preferred stocks issued by banks, insurers and REITs and $8 million for a private equity investment.

23

Results of Operations for the Nine Months Ended September 30, 2008 and 2007

Business Segment Results

     The following is a summary of gross and net premiums written, premiums earned, loss ratios (losses and loss expenses incurred expressed as a percentage of premiums earned), expense ratios (underwriting expenses expressed as a percentage of premiums earned) and combined ratios (sum of loss ratio and expense ratio) for each of our business segments for the nine months ended September 30, 2008 and 2007. The combined ratio represents a measure of underwriting profitability, excluding investment income. A combined ratio in excess of 100 indicates an underwriting loss; a number below 100 indicates an underwriting profit.

	For the Nine Months
	Ended September 30,
(dollars in thousands)	2008			2007
Specialty
Gross premiums written	$	1,207,800		$	1,366,404
Net premiums written		1,109,508			1,288,917
Premiums earned		1,228,720			1,327,509
Loss ratio		59.9	%		57.2	%
Expense ratio		28.2	%		26.4	%
Combined ratio		88.1	%		83.6	%
Regional
Gross premiums written	$	1,077,644		$	1,104,431
Net premiums written		938,368			968,146
Premiums earned		927,585			929,537
Loss ratio		66.8	%		59.1	%
Expense ratio		31.9	%		31.3	%
Combined ratio		98.7	%		90.4	%
Alternative Markets
Gross premiums written	$	590,592		$	618,654
Net premiums written		517,447			541,578
Premiums earned		468,243			487,616
Loss ratio		62.2	%		57.9	%
Expense ratio		23.8	%		23.3	%
Combined ratio		86.0	%		81.2	%
Reinsurance
Gross premiums written	$	367,555		$	592,433
Net premiums written		347,960			548,121
Premiums earned		408,911			572,823
Loss ratio		66.1	%		66.8	%
Expense ratio		34.3	%		29.6	%
Combined ratio		100.4	%		96.4	%
International
Gross premiums written	$	276,526		$	211,228
Net premiums written		232,164			177,263
Premiums earned		220,802			184,652
Loss ratio		63.6	%		65.9	%
Expense ratio		38.2	%		31.6	%
Combined ratio		101.8	%		97.5	%
Consolidated
Gross premiums written	$	3,520,117		$	3,893,150
Net premiums written		3,145,447			3,524,025
Premiums earned		3,254,261			3,502,137
Loss ratio		63.2	%		59.8	%
Expense ratio		30.0	%		28.1	%
Combined ratio		93.2	%		87.9	%

24

          The following table presents the Company’s net income and net income per diluted share for the nine months ended September 30, 2008 and 2007 (amounts in thousands, except per share data):

	2008		2007
Net income	$	240,815	$	559,522
Weighted average diluted shares		175,369		199,247
Net income per diluted share	$	1.37	$	2.81

          Net income decreased to $241 million in 2008 from $560 million in 2007 due to realized investment losses of $248 million in 2008 as compared to realized investment gains of $13 million in 2007. In addition, underwriting profits and investment income were lower. The decrease in weighted average diluted shares resulted from the Company’s repurchases of its common stock in 2007 and in the first nine months of 2008.

          Gross Premiums Written. Gross premiums written were $3.5 billion in 2008, down 10% from 2007. The Company has experienced increased competition and downward pressure on pricing since 2004. This trend has continued in 2008, with overall price levels for renewal business declining approximately 6% as compared with the prior year period.

          A summary of gross premiums written in the 2008 compared with 2007 by business segment follows:

• Specialty gross premiums decreased by 12% to $1,208 million in 2008 from $1,366 million in 2007. The number of new and renewal policies issued in 2008, net of policy cancellations, decreased 2%. Average prices for renewal policies, adjusted for changes in exposure, decreased 7%. Gross premiums written decreased 25% for premises operations, 24% for products liability, 7% for commercial automobile and 8% for property lines. Gross premiums written increased 12% for professional liability.

• Regional gross premiums decreased by 2% to $1,078 million in 2008 from $1,104 million in 2007. The number of new and renewal policies issued in 2008, net of policy cancellations, decreased 1%. Average prices for renewal policies, adjusted for changes in exposure, decreased 3%. Gross premiums written decreased 4% for commercial automobile, 1% for workers’ compensation and 3% for commercial multiple peril. Gross premiums include assigned risk premiums, which are fully reinsured, of $69 million in 2008 and $70 million in 2007.

• Alternative Markets gross premiums decreased by 5% to $591 million in 2008 from $619 million in 2007. The number of new and renewal policies issued (excluding personal accident business which is a new line of business for the Company) decreased 12% in 2008, net of policy cancellations. Average prices for renewal policies, adjusted for changes in exposure, decreased 7%. Gross premiums written decreased 11% for excess workers’ compensation and 1% for primary workers’ compensation. Gross premiums include assigned risk premiums, which are fully reinsured, of $33 million in 2008 and $46 million in 2007.

• Reinsurance gross premiums decreased by 38% to $368 million in 2008 from $592 million in 2007. Average prices for renewal business decreased 7%. Casualty gross premiums written decreased 33% to $307 million, and property gross premiums written decreased 55% to $61 million.

• International gross premiums increased by 31% to $277 million in 2008 from $211 million in 2007. Gross premiums in the U.K. and Continental Europe increased 4% primarily as a result of expanded product offerings. Gross premiums in South America increased 37% as a result of higher price levels and new business. Gross premiums for the Australian branch, which began operating in 2008, were $19 million.

25

          Premiums Earned.Premiums earned decreased 7% to $3,254 million from $3,502 million in 2007. Insurance premiums are earned ratably over the policy term, and therefore premiums earned in 2008 are related to business written during both 2008 and 2007. The 7% decrease for 2008 earned premiums reflects the underlying decline in net premiums written in 2007 and 2008.

     Net Investment Income. Following is a summary of net investment income for the nine months ended September 30, 2008 and 2007 (dollars in thousands):

							Average Annualized
	Amount						Yield
	2008			2007			2008			2007
Fixed maturity securities, including cash	$	379,355		$	371,105			4.7	%		4.8	%
Arbitrage trading account and funds		16,782			65,917			2.7	%		10.8	%
Partnerships and affiliates		28,389			31,402			7.5	%		9.1	%
Equity securities available for sale		31,296			33,094			5.5	%		5.5	%
Other		4,808			8,510
Gross investment income		460,630			510,028			4.8	%		5.5	%
Investment expenses and interest on funds held		(8,792	)		(9,874	)
Total	$	451,838		$	500,154			4.7	%		5.4	%

     Net investment income decreased 10% to $452 million in 2008 from $500 million in 2007 primarily as a result of lower income from the arbitrage trading account. Earnings from arbitrage investments decreased 75% due to a reduction in merger activity and to a significant widening of spreads on merger transactions in September 2008. Income from partnerships and affiliates, in 2008, included earnings of $36 million from an external investment fund as a result of an increase in the fair values of its investments. Average invested assets, at cost (including cash and cash equivalents) increased 3% to $12.9 billion in 2008 from $12.4 billion in 2007 primarily as a result of cash flow from operations, partially offset by cash used for repurchases of the Company’s common stock.

     Insurance Service Fees. The Alternative Markets and Specialty segments offer fee-based services to help clients develop and administer self-insurance programs, primarily for workers’ compensation coverage. Service fees increased to $78 million in 2008 from $75 million in 2007 primarily as a result of a business acquired by the Company in October 2007.

     Realized Investment Gains (Losses). Realized investment gains (losses) result primarily from sales of securities, as well as from provisions for other than temporary impairment in securities. The Company buys and sells securities on a regular basis in order to maximize its total return on investments. Decisions to sell securities are based on management’s view of the underlying fundamentals of specific securities as well as management’s expectations regarding interest rates, credit spreads, currency values and general economic conditions.

     Realized investment losses were $248 million in 2008 compared with realized investment gains of $13 million in 2007. Investment impairments in 2008 were $329 million and included $263 million from the write down of preferred stocks issued by Fannie Mae and Freddie Mac, which were placed into conservatorship in September 2008. Impairment losses also included $58 million for preferred stocks issued by banks, insurers and REITs and $8 million for a private equity investment. Net realized investment gains (excluding investment impairments) in 2008 were $81 million, including a gain of $70 million from the sale of the Company’s interest in Kiln Ltd.

26

          Revenues from Wholly-Owned Investees. Revenues from wholly-owned investees were $93 million in 2008 compared with $61 million in 2007. These revenues were derived from three fixed base operators that were separately purchased in 2007 and 2008. These companies provide services to the general aviation market, including fuel and line service, aircraft sales and maintenance, avionics and engineering services and parts fabrication. The 2008 and 2007 revenues are not comparative since the companies are not included for the same periods.

          Losses and Loss Expenses. Losses and loss expenses decreased to $2,057 million in 2008 from $2,095 million in 2007. The consolidated loss ratio was 63.2% in 2008 compared with 59.8% in 2007. Estimated loss ratios for accident year 2008 were higher due to higher weather-related losses as well as to a decline in price levels and to higher expected loss cost trends and inflation. Weather-related losses were $99 million (excluding reinstatement premiums) in 2008 compared with $30 million in 2007. The increase in accident year 2008 loss ratios was partially offset by favorable prior year reserve development. Net favorable prior year development was $155 million in 2008 compared with $71 million in 2007. The favorable loss reserve development was primarily related to the Specialty segment. The Company also experienced favorable development for the Regional, Alternative Markets and International segments. A summary of loss ratios in 2008 compared with 2007 by business segment follows:

• Specialty’s loss ratio increased to 59.9% in 2008 from 57.2% in 2007. Estimated loss ratios for accident year 2008 were higher due to a decline in price levels and a more competitive market environment. The increase in accident year 2008 loss ratios was partially offset by favorable reserve development. Net favorable prior year development was $92 million in 2008 compared with $57 million in 2007.

• The Regional loss ratio increased to 66.8% in 2008 from 59.1% in 2007. Estimated loss ratios for accident year 2008 were higher due to higher weather-related losses and to a decline in price levels. Weather-related losses were $80 million in 2008 compared with $30 million in 2007. Net favorable prior year development was $23 million in 2008 compared with $24 million in 2007.

• Alternative Markets’ loss ratio increased to 62.2% from 57.9% 2007. Estimated loss ratios for accident year 2008 were higher due to a decline in price levels and a more competitive market environment. Net favorable prior year development was $30 million in 2008 compared with $24 million in 2007.

• The Reinsurance loss ratio decreased to 66.1% in 2008 from 66.8% in 2007 due to more favorable reserve development, which was partially offset by $14 million of weather-related losses and by a decline in price levels. Net favorable prior year development was $3 million in 2008 compared with unfavorable prior year development of $35 million in 2007.

• The International loss ratio decreased to 63.6% in 2008 from 65.9% in 2007 due to favorable reserve development and a change in the mix of business. Favorable prior year development was $7 million in 2008 compared with none in 2007.

27

     Other Operating Costs and Expenses.Following is a summary of other operating costs and expenses for the nine months ended September 30, 2008 and 2007 (dollars in thousands):

	2008		2007
Underwriting expenses	$	977,617	$	984,508
Service expenses		66,009		68,656
Other costs and expenses		71,376		86,591
Total	$	1,115,002	$	1,139,755

     Underwriting expenses are comprised of commissions paid to agents and brokers, premium taxes and other assessments and internal underwriting costs. The consolidated expense ratio (underwriting expenses expressed as a percentage of premiums earned) increased to 30.0% in 2008 from 28.1% in 2007 primarily due to the decline in earned premiums.

     Service expenses, which represent the costs associated with the Alternative Markets and Specialty segments’ fee-based businesses, decreased 4% to $66 million due to lower employment costs.

     Other costs and expenses, which represent expenses not allocated to the business segments decreased 18% to $71 million. The decrease was due to lower incentive compensation costs and to foreign currency transaction gains.

     Expenses from Wholly-Owned Investees. Expenses from wholly-owned investees were $91 million in 2008 compared to $57 million in 2007. These expenses represent costs associated with three fixed base operators that were separately purchased in 2007 and 2008. These include cost of goods sold related to aircraft and other sales, labor and equipment costs related to repairs and other services and general and administrative expenses. The 2008 and 2007 expenses are not comparative since the companies are not included for the same periods.

     Interest Expense. Interest expense decreased 3% to $64 million primarily due to the repayment of $89 million of 9.875% senior notes in May 2008.

     Income Taxes. The effective income tax rate was 20% in 2008 and 30% in 2007. The effective tax rate differs from the federal income tax rate of 35% primarily because of tax-exempt investment income, which represented a greater portion of pre-tax income in 2008.

28

Results of Operations for the Three Months Ended September 30, 2008 and 2007

     Following is a summary of gross and net premiums written, premiums earned, loss ratios (losses and loss expenses incurred expressed as a percentage of premiums earned), expense ratios (underwriting expenses expressed as a percentage of premiums earned) and combined ratios (sum of loss ratio and expense ratio) for each of our business segments for the three months ended September 30, 2008 and 2007. The combined ratio represents a measure of underwriting profitability, excluding investment income. A combined ratio in excess of 100 indicates an underwriting loss; a number below 100 indicates an underwriting profit.

	For the Three Months
	Ended September 30,
(dollars in thousands)	2008			2007
Specialty
Gross premiums written	$	373,078		$	427,878
Net premiums written		335,782			402,332
Premiums earned		389,967			441,944
Loss ratio		62.9	%		57.8	%
Expense ratio		28.8	%		26.8	%
Combined ratio		91.7	%		84.6	%
Regional
Gross premiums written	$	343,016		$	355,134
Net premiums written		299,504			312,716
Premiums earned		306,892			315,358
Loss ratio		69.3	%		58.7	%
Expense ratio		32.5	%		31.9	%
Combined ratio		101.8	%		90.6	%
Alternative Markets
Gross premiums written	$	201,347		$	214,320
Net premiums written		178,634			190,247
Premiums earned		157,149			165,686
Loss ratio		64.8	%		60.3	%
Expense ratio		24.2	%		23.2	%
Combined ratio		89.0	%		83.5	%
Reinsurance
Gross premiums written	$	104,507		$	177,198
Net premiums written		99,368			166,555
Premiums earned		124,710			190,559
Loss ratio		68.9	%		65.5	%
Expense ratio		33.7	%		29.9	%
Combined ratio		102.6	%		95.4	%
International
Gross premiums written	$	98,186		$	69,579
Net premiums written		83,045			60,639
Premiums earned		76,523			62,017
Loss ratio		63.3	%		66.5	%
Expense ratio		38.0	%		30.0	%
Combined ratio		101.3	%		96.5	%
Consolidated
Gross premiums written	$	1,120,134		$	1,244,109
Net premiums written		996,333			1,132,489
Premiums earned		1,055,241			1,175,564
Loss ratio		65.8	%		60.1	%
Expense ratio		30.4	%		28.4	%
Combined ratio		96.2	%		88.5	%

29

          The following table presents the Company’s net income (loss) and net income (loss) per diluted share for the three months ended September 30, 2008 and 2007 (amounts in thousands, except per share data):

	2008			2007
Net income (loss)	$	(27,880	)	$	180,463
Weighted average diluted shares		162,675			193,719
Net income (loss) per diluted share	$	(.17	)	$	.93

          The Company reported a net loss in 2008 of $28 million compared to net income in 2007 of $180 million due to realized investment losses of $220 million in 2008 as compared to realized investment gains of $1 million in 2007. In addition, underwriting profits and investment income were lower. The decrease in weighted average diluted shares resulted from the Company’s repurchases of its common stock in 2007 and in the first nine months of 2008.

          Gross Premiums Written. Gross premiums written were $1.1 billion in 2008, down 10% from 2007. The Company has experienced increased competition and downward pressure on pricing since 2004. This trend continued in 2008, with overall price levels for renewal business declining approximately 5% as compared with the prior year period.

          A summary of gross premiums written in the 2008 period compared with 2007 by business segment follows:

• Specialty gross premiums decreased by 13% to $373 million in 2008 from $428 million in 2007. The number of new and renewal policies issued in 2008, net of policy cancellations, increased 2%. Average prices for renewal policies, adjusted for changes in exposure, decreased 6%. Gross premiums written decreased 28% for premises operations, 29% for products liability, 8% for commercial automobile and 8% for property lines. Gross premiums written increased 11% for professional liability.

• Regional gross premiums decreased by 3% to $343 million in 2008 from $355 million in 2007. The number of new and renewal policies issued in 2008, net of policy cancellations, increased 1%. Average prices for renewal policies, adjusted for changes in exposure, decreased 3%. Gross premiums written decreased 6% for commercial automobile, 1% for workers’ compensation and 3% for commercial multiple peril. Gross premiums include assigned risk premiums, which are fully reinsured, of $18 million in 2008 and $21 million in 2007.

• Alternative Markets gross premiums decreased by 6% to $201 million in 2008 from $214 million in 2007. The number of new and renewal policies issued (excluding personal accident business which is a new line of business for the Company), decreased 25% in 2008, net of policy cancellations. Average prices for renewal policies, adjusted for changes in exposure, decreased 5%. Gross premiums written decreased 11% for excess workers’ compensation and 3% for primary workers’ compensation. Gross premiums include assigned risk premiums, which are fully reinsured, of $8 million in 2008 and $11 million in 2007.

• Reinsurance gross premiums decreased by 41% to $105 million in 2008 from $177 million in 2007. Average prices for renewal business decreased 8%. Casualty gross premiums written decreased 36% to $91 million, and property gross premiums written decreased 60% to $14 million.

• International gross premiums increased by 41% to $98 million in 2008 from $70 million in 2007. Gross premiums in the UK and Continental Europe decreased 5% primarily as a result of changes in exchange rates. Gross premiums in South America increased 51% as a result of higher price levels and new business. Gross premiums for the Australian branch, which began operating in 2008, were $13 million.

30

     Premiums Earned.Premiums earned decreased 10% to $1,055 million from $1,176 million in 2007. Insurance premiums are earned ratably over the policy term, and therefore premiums earned in 2008 are related to business written during both 2008 and 2007. The 10% decrease for 2008 earned premiums reflects the underlying decline in net premiums written in 2007 and 2008.

     Net Investment Income. Following is a summary of net investment income for the three months ended September 30, 2008 and 2007.

							Average Annualized
(dollars in thousands)	Amount						Yield
	2008			2007			2008			2007
Fixed maturity securities, including cash	$	120,062		$	128,197			4.5	%		4.9	%
Arbitrage trading account and funds		(2,571	)		21,121			(1.3	)%		10.2	%
Partnerships and affiliates		31,057			6,752			23.8	%		5.7	%
Equity securities available for sale		7,387			12,334			4.5	%		5.9	%
Other		628			2,839
Gross investment income		156,563			171,243			4.9	%		5.4	%
Investment expenses and interest on funds held		(3,161	)		(5,453	)
Total	$	153,402		$	165,790			4.8	%		5.2	%

     Net investment income decreased 7% to $153 million in 2008 from $166 million in 2007. The arbitrage account reported a loss in 2008 due to significant widening of spreads on merger transactions in September 2008. Investment income from fixed maturity securities decreased 6% primarily as a result of lower short-term investment yields. Income from partnerships and affiliates included earnings of $34 million from an external investment fund as a result of an increase in the fair values of its investments. Average invested assets (including cash and cash equivalents) were $12.7 billion in 2008 and 2007 as cash flow from operations was offset by cash used for repurchases of the Company’s common stock and by realized and unrealized investment losses.

     Insurance Service Fees. The Alternative Markets and Specialty segments offer fee-based services to help clients develop and administer self-insurance programs, primarily for workers’ compensation coverage. Service fees were $26 million in 2008 and $24 million in 2007.

     Realized Investment Gains (Losses). Realized investment gains (losses) result primarily from sales of securities, as well as from provisions for other than temporary impairment in securities. The Company buys and sells securities on a regular basis in order to maximize the total return on investments. Decisions to sell securities are based on management’s view of the underlying fundamentals of specific securities as well as management’s expectations regarding interest rates, credit spreads, currency values and general economic conditions.

     Realized investment losses were $220 million in 2008 compared with realized investment gains of $1 million in 2007. Investment impairments in 2008 were $228 million and included $211 million from the write down of preferred stocks issued by Fannie Mae and Freddie Mac, which were placed into conservatorship in September 2008. Impairment losses also included $17 million for preferred stocks issued by REITs.

     Revenues from Wholly-Owned Investees. Revenues from wholly-owned investees were $40 million in 2008 compared with $42 million in 2007. These revenues were derived from three fixed base operators that were separately purchased in 2007 and 2008. These companies provide services to the general aviation market, including fuel and line service, aircraft sales and maintenance, avionics and engineering services and parts fabrication.

31

          Losses and Loss Expenses. Losses and loss expenses decreased 2% to $694 million in 2008 from $706 million in 2007. The consolidated loss ratio was 65.8% in 2008 compared with 60.1% in 2007. Estimated loss ratios for accident year 2008 were higher due to higher weather-related losses as well as to a decline in price levels and to higher expected loss cost trends and inflation. Weather-related losses were $54 million (excluding reinstatement premiums) in 2008 compared with $8 million in 2007. The increase in accident year 2008 loss ratios was partially offset by favorable prior year reserve development. Net favorable prior year development was $49 million in 2008 compared with $18 million in 2007. The favorable loss reserve development was primarily related to the Specialty segment. The Company also experienced favorable development for the Alternative Markets and International segments. A summary of loss ratios in 2008 compared with 2007 by business segment follows:

• Specialty’s loss ratio increased to 62.9% in 2008 from 57.8% in 2007 as higher estimated loss ratios for accident year 2008 were partially offset by favorable reserve development. Favorable prior year development was $31 million in 2008 compared with $19 million in 2007.

• The Regional loss ratio increased to 69.3% in 2008 from 58.7% in 2007. Estimated loss ratios for accident year 2008 were higher due to higher weather-related losses and to a decline in price levels. Weather-related losses were $34 million in 2008 compared with $5 million in 2007. Net favorable prior year development was $12 million in 2007 compared with none in 2008.

• Alternative Markets’ loss ratio increased to 64.8% from 60.3% 2007 due to higher estimated loss ratios for accident year 2008. Net favorable prior year development was $5 million in 2008 compared with $6 million in 2007.

• The Reinsurance loss ratio increased to 68.9% in 2008 from 65.5% in 2007 primarily due to more favorable reserve development and to a change in the mix of business. Net favorable prior year development of $9 million in 2008 as compared with net unfavorable prior year development of $17 million in 2007.

• The International loss ratio decreased to 63.3% in 2008 from 66.5% in 2007 primarily due to a change in the mix of business. Favorable prior year development was $3 million in 2008 compared with net unfavorable prior year development of $2 million in 2007.

          Other Operating Costs and Expenses.Following is a summary of other operating costs and expenses for the three months ended September 30, 2008 and 2007 (dollars in thousands):

	2008		2007
Underwriting expenses	$	321,203	$	333,414
Service expenses		21,513		22,014
Other costs and expenses		15,864		27,102
Total	$	358,580	$	382,530

          Underwriting expenses are comprised of commissions paid to agents and brokers, premium taxes and other assessments and internal underwriting costs. Underwriting expenses decreased 4% in 2008 primarily as a result of lower commissions, partially offset by higher employment costs. The consolidated expense ratio (underwriting expenses expressed as a percentage of premiums earned) increased to 30.4% in 2008 from 28.4% in 2007 primarily due to the decline in earned premiums.

          Service expenses, which represent the costs associated with the Alternative Markets and Specialty segments’ fee-based businesses, were $22 million in 2008 and 2007.

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     Other costs and expenses, which represent expenses not allocated to the business segments, decreased 41% to $16 million primarily as a result of lower employment costs and to foreign currency transaction gains.

     Expenses from Wholly-Owned Investees.Expenses from wholly-owned investees were $39 million in 2008 and 2007. These expenses represent costs associated with three fixed base operators that were separately purchased in 2007 and 2008. These include cost of goods sold related to aircraft and other sales, labor and equipment costs related to repairs and other services and general and administrative expenses.

     Interest Expense. Interest expense decreased 11% to $20 million primarily as a result of the repayment of $89 million of 9.875% senior notes in May 2008.

     Income Taxes. The effective income tax rate was a benefit of 51% in 2008 and an expense of 30% in 2007. The effective tax rate differs from the federal income tax rate of 35% primarily because of tax-exempt investment income. Since the Company reported a pre-tax loss in 2008, tax-exempt income increased the effective tax rate benefit to 51%.

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Investments

     As part of its investment strategy, the Company establishes a level of cash and highly liquid short-term and intermediate-term securities that, combined with expected cash flow, it believes adequate to meet payment obligations. The Company also attempts to maintain an appropriate relationship between the average duration of the investment portfolio and the approximate duration of its liabilities, i.e., policy claims and debt obligations.

     The Company’s investment portfolio and investment-related assets as of September 30, 2008 were as follows (dollars in thousands):

			Carrying
	Cost		Value
Fixed maturity securities
United States Government and government agencies	$	1,109,073	$	1,127,718
State and municipal		5,535,252		5,465,186
Mortgage-backed securities
Agency		928,616		936,858
Residential-Prime		464,654		430,950
Residential-Alt A		114,747		104,607
Commercial		75,669		68,551
Total mortgage-backed securities		1,583,686		1,540,966
Corporate
Financial		371,852		327,308
Industrial		238,394		222,881
Asset-backed		205,352		190,072
Utilities		127,672		124,698
Other		79,760		79,668
Total corporate		1,023,030		944,627
Foreign government and foreign government agencies		329,842		336,032
Total fixed maturity securities		9,580,883		9,414,529
Equity securities available for sale
Preferred stock
Financial		202,502		138,462
Real estate		154,664		139,943
Utilities		57,648		53,515
Total preferred stock		414,814		331,920
Common stock		129,217		137,799
Total equity securities available for sale		544,031		469,719
Arbitrage trading account		263,387		263,387
Investment in arbitrage funds		212,218		212,218
Partnerships and affiliates		545,666		550,292
Loans receivable		308,181		308,181
Total investments	$	11,454,366	$	11,218,326

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     Fixed Maturity Securities. The Company’s investment policy with respect to fixed maturity securities is generally to purchase instruments with the expectation of holding them to their maturity. However, management of the available for sale portfolio is considered necessary to maintain an approximate matching of assets and liabilities as well as to adjust the portfolio as a result of changes in financial market conditions and tax considerations. At September 30, 2008 (as compared to December 31, 2007), the fixed maturity securities portfolio mix was as follows: U.S. Government securities were 12% (15% in 2007); state and municipal securities were 58% (53% in 2007); corporate securities were 10% (11% in 2007); mortgage-backed securities were 16% (18% in 2007); and foreign government bonds were 4% (3% in 2007).

     The Company’s philosophy related to holding or selling fixed maturity securities is based on its objective of maximizing total return. The key factors that management considers in its investment decisions as to whether to hold or sell fixed maturity securities are its view of the underlying fundamentals of specific securities as well as its expectations regarding interest rates, credit spreads and currency values. In a period in which management expects interest rates to rise, the Company may sell longer duration securities in order to mitigate the impact of an interest rate rise on the market value of the portfolio. Similarly, in a period in which management expects credit spreads to widen, the Company may sell lower quality securities, and in a period in which management expects certain foreign currencies to decline in value, the Company may sell securities denominated in those foreign currencies. The sale of fixed maturity securities in order to achieve the objective of maximizing total return may result in realized gains; however, there is no reason to expect these gains to continue in future periods.

     Equity Securities Available for Sale. Equity securities available for sale primarily represent investments in common and preferred stocks of publicly traded REITs, financial companies and utilities.

     Arbitrage Trading Account. The arbitrage trading account is comprised of direct investments in arbitrage securities. Merger arbitrage is the business of investing in the securities of publicly held companies that are the targets in announced tender offers and mergers. Convertible arbitrage is the business of investing in convertible securities with the goal of capitalizing on price differentials between these securities and their underlying equities.

     Investment in Arbitrage Funds. Investment in merger arbitrage funds represents investments in limited partnerships that specialize in merger arbitrage and convertible arbitrage strategies.

     Partnerships and Affiliates. At September 30, 2008 and December 31, 2007, the Company’s investment in partnerships and affiliates was $550 million and $546 million, respectively, and included investments in real estate funds of $304 million and $294 million, respectively.

     In March 2008, the Company sold its interest in Kiln Ltd for $174 million and reported a realized investment gain of $70 million. At December 31, 2007, the carrying value of the Company’s investment in Kiln Ltd was $109 million.

     Loans Receivable. Loans receivable represent commercial real estate mortgage loans and related instruments with maturities of five years or less and floating, LIBOR-based interest rates.

Liquidity and Capital Resources

     Cash Flow. Cash flow provided from operating activities decreased to $780 million in 2008 from $1,130 million in 2007 due to a decline in premiums collected and investment income

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received as well as an increase in paid losses. Cash flow provided by operating activities in 2008 includes cash transfers from the arbitrage trading account of $50 million.

     The Company’s insurance subsidiaries’ principal sources of cash are premiums, investment income, service fees and proceeds from sales and maturities of portfolio investments. The principal uses of cash are payments for claims, taxes, operating expenses and dividends. The Company expects its insurance subsidiaries to fund the payment of losses with cash received from premiums, investment income and fees. The Company targets an average duration for its investment portfolio that is within one year of the average duration of its liabilities so that portions of its investment portfolio mature throughout the claim cycle and are available for the payment of claims if necessary. In the event operating cash flow and proceeds from maturities and prepayments of fixed income securities are not sufficient to fund claim payments and other cash requirements, the remainder of the Company’s cash and investments is available to pay claims and other obligations as they become due. The Company’s investment portfolio is highly liquid, with approximately 83% invested in cash, cash equivalents and marketable fixed maturity securities as of September 30, 2008. If the sale of fixed maturity securities were to become necessary, a realized gain or loss equal to the difference between the cost and sales price of securities sold would be recognized.

Financing Activity

     In the first nine months of 2008, the Company repurchased 19,675,944 shares of its common stock for $535 million. In January 2008, the Company repaid $12 million of subsidiary debt. In May 2008, the Company repaid $89 million of 9.875% senior notes.

     At September 30, 2008, the Company had senior notes, junior subordinated debentures and other debt outstanding with a carrying value of $1,274 million and a face amount of $1,291 million. The maturities of the outstanding debt are $1 million in 2008, $4 million in 2009, $150 million in 2010, $2 million in 2012, $200 million in 2013, $200 million in 2015, $150 million in 2019, $77 million in 2022, $7 million in 2035 (prepayable in 2010), $250 million in 2037 and $250 million in 2045 (prepayable in 2010).

     At September 30, 2008, stockholders’ equity was $3.0 billion and total capitalization (stockholders’ equity, senior notes, junior subordinated debentures and other debt) was $4.3 billion. The percentage of the Company’s capital attributable to senior notes, junior subordinated debentures and other debt was 29% at September 30, 2008 and 28% at December 31, 2007.

Item 3.Quantitative and Qualitative Disclosure About Market Risk

     The Company’s market risk generally represents the risk of loss that may result from the potential change in the fair value of the Company’s investment portfolio as a result of fluctuations in prices, interest rates and currency exchange rates. The Company attempts to manage its interest rate risk by maintaining an appropriate relationship between the average duration of its investment portfolio and the approximate duration of its liabilities, i.e., policy claims and debt obligations. The duration of the investment portfolio was 3.6 years at September 30, 2008 and 3.3 years at December 31, 2007.

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Item 4.Controls and Procedures

     Disclosure Controls and Procedures. The Company’s management, including its Chief Executive Officer and Chief Financial Officer, has conducted an evaluation of the effectiveness of the Company’s disclosure controls and procedures pursuant to Securities Exchange Act Rule 13a-14 as of the end of the period covered by this quarterly report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company has in place effective controls and procedures designed to ensure that information required to be disclosed by the Company in the reports it files or submits under the Securities Exchange Act and the rules thereunder, is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms.

     Changes in Internal Control over Financial Reporting. During the quarter ended September 30, 2008, there were no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1.Legal Proceedings

     The Company’s subsidiaries are subject to disputes, including litigation and arbitration, arising in the ordinary course of their insurance and reinsurance businesses. The Company’s estimates of the costs of settling such matters are reflected in its aggregate reserves for losses and loss expenses, and the Company does not believe that the ultimate outcome of such matters will have a material adverse effect on its financial condition or results of operations.

Item 1A.Risk Factors

     There have been no material changes from the risk factors previously disclosed in the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2007.

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds

     Set forth below is a summary of the shares repurchased by the Company during the quarter and the number of shares remaining authorized for purchase by the Company.

							Maximum number of
	Total				Total number of shares		shares that may
	number of		Average price		purchased as part of		yet be purchased
	shares		paid per		publicly announced plans		under the plans or
	purchased		share		or programs		programs (1)
July 2008		1,028,500	$	23.72		1,028,500		9,924,600
August 2008		591,900		22.88		591,900		9,332,700
September 2008		288,579		23.03		248,800		9,083,900

(1) Remaining shares available for repurchase under the Company’s repurchase authorization of 10,000,000 shares approved by the Board of Directors on July 29, 2008.

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Item 6.Exhibits 

Number
(31.1)	Certification of the Chief Executive Officer pursuant to Rule 13a-14(a)/ 15d-14(a).
(31.2)	Certification of the Chief Financial Officer pursuant to Rule 13a-14(a)/ 15d-14(a).
(32.1)	Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.

	W. R. BERKLEY CORPORATION
Date: November 10, 2008	/s/ William R. Berkley
	William R. Berkley
	Chairman of the Board and Chief Executive Officer
Date: November 10, 2008	/s/ Eugene G. Ballard
	Eugene G. Ballard
	Senior Vice President, Chief Financial Officer and Treasurer

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